Morgan Stanley (MS) was recently gaining 1.7% and Citigroup (C) was up 1% as the two agreed to delay the appraisal of their Morgan Stanley Smith Barney joint venture. Both took a hit last month when Morgan Stanley’s plan to buy an additional 14% brought to light the fact that the two banks had very different valuations on the brokerage.

Other big names like Bank of America (BAC) and Goldman Sachs (GS) were moving up more than 0.5% in afternoon trading. First Horizon National (FHN) and SunTrust Banks (STI) were gaining 2% or more.

Stifel Nicolaus analyst Chris Brendler reiterated his Buy rating on CIT Group (CIT), his top pick, writing that he is increasing confident about his above consensus estimates. He writes “Specifically, our 2012 estimate falls to a loss of $2.05 from ($0.34) and 2013 rises to $4.80 from $3.85. The changes are almost entirely driven by FSA accounting as the company disclosed in its most recent 8k that it expects a 3Q12 charge of up to $460 mil of accelerated interest expense accretion related to the debt repayments. Despite the accounting noise in 2012 and 2013, our 2014 estimate only falls slightly to $6.82. We continue to believe that strong new business volume growth coupled with the reduction in interest expense (no 7% debt remaining) will drive the NIM into the mid 3% range and result in core EPS of $5.65 in 2014.”

He concludes that while buyback also provide long-term upside, core NIM “is poised to provide a surprisingly strong near-term boost,” and also writes that he expects the Fed to clear the way to capital relief in 2013.

The shares were recently trading up to $38; Brendler’s $52 price target is nearly 37% above current levels.

Banks have had a good run in recent months, notching double-digit gains against the S&P 500, but FBR Capital Markets analyst Paul Miller thinks that there is still more growth ahead for the highest quality names in large-cap and regional banks. Although he sees continued headwinds in the form of low interest rates and stagnant loan growth, he sees bright spots in mortgage banking revenues and increased capital markets activity compared to the low levels in the fourth quarter of 2011.

Ahead of earnings season, set to officially kick off tonight with Alcoa’s (AA) results, Miller thinks that large-cap banks with exposures to these bright spots are investors’ best bets, and he favors Wells Fargo (WFC), JPMorgan (JPM), Goldman Sachs (GS) and PNC Financial (PNC).

Among regional banks, he likes those with good credit quality and capital bases and recommends Webster Financial Corporation (WBS), Signature Bank (SBNY), and Fifth Third Bancorp (FITB). However, he is cautious on First Horizon (FHN), which he lowered from Market Perform to Underperform, given its “elevated expense base and reps & warrants exposure.” He rates SunTrust (STI) at Market Perform, as he believes it could be difficult for the bank to live up to expectations, following its rally in recent months.

Read further details from his note below:

Total loan balances for commercial banks continued their upward trajectory in 1Q12 (through 3/21/12), increasing $81B, or 1%, and have increased $296B, or 4% YOY. Surprisingly this quarter, growth in closed-end residential loans contributed more than half of the growth in total loans, as banks struggled to meet investors’ expectations. Banks with above-average loan growth attribute most of it to market share gains, similar to prior quarters. We believe that this, coupled with select rerisking of balance sheets, could be two themes that we hear more about through first-quarter earnings season.

Interest rates, specifically the 10-year Treasury, remain historically low, even after a 35 bps uptick this quarter. YOY, the yield on the 10-year Treasury has declined 123 bps, which will continue to be a negative for bank net interest margins. That said, lower NIMs are factored into our estimates already, and we believe growth in earning assets could neutralize the effect that NIM compression has on the top line.

Large-cap banks continue to trade at a discount to small- and mid-cap peers, even after having cut the valuation gap in half (on a TBV basis) over the last three months. Large caps trade at 9.9x 2013 consensus EPS and 1.3x TBV a discount to small- and mid-cap peers. Our feeling is that this gap will continue to narrow as investors further appreciate a strengthening economy, potential regulatory reform, and the large caps’ diversified revenue streams.

We are lowering our rating on First Horizon National Corporation (FHN) from Market Perform to Underperform, but keeping our price target at $9. Although FHN has made progress by returning to profitability this past year, we believe the company will have difficulty meeting street expectations for earnings as (1) reserve releases start to dry up in the next couple of quarters, (2) reps and warrants claims remain elevated, and (3) the company will need to execute on a very difficult cost-cutting initiative.

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.